New OECD Outcome Statement on Pillar One Kicks Can Down the Road

The OECD-led Inclusive Framework on Base Erosion and Profit Shifting just issued a three-page document that appears to indicate an agreement has been reached on the Pillar One rules, which will be embodied in a multilateral convention.

A close reading, however, reveals that the Inclusive Framework hasn’t yet succeeded in resolving outstanding issues relating to Amounts A and B, the two main components of Pillar One.

The Organization for Economic Cooperation and Development’s outcome statement doesn’t reveal which issues continue to be the subject of disagreement, but the consideration of withholding taxes in the application of the marketing and distribution profits safe harbor is a likely one. Developing countries have been saying for the past couple of years that this is something they can’t agree to, while G7 members such as the US have been insisting that withholding taxes must be included in the computation.

The statement, to which I’ve noted a key footnote into the text as a parenthetical, says, “The Inclusive Framework has delivered a text of a Multilateral Convention (MLC) (with efforts continuing on a small number of specific items).” Additionally, “A few jurisdictions have expressed concerns with some specific items in the MLC. Efforts to resolve these issues are underway with a view to prepare the MLC for signature expeditiously. The MLC will be opened in the second half of 2023 and a signing ceremony will be organised by year end.”

Depending on how many countries sign the MLC, and how many in-scope multinational enterprises are based in those countries, the 138 Inclusive Framework members who signed the outcome statement will extend the current moratorium on digital services taxes, which is due to expire at the end of this year.

The statement also says that at “at least 30 jurisdictions accounting for at least 60 percent of the Ultimate Parent Entities (UPEs) of in-scope MNEs signing the MLC before the end of 2023, members of the Inclusive Framework agree to refrain from imposing newly enacted DSTs or relevant similar measures.” This indicates that the OECD expects the US to sign the MLC, as more than 40% of in-scope MNEs are headquartered in the US.

Of course, congressional ratification is a long shot at best, so there’s still doubt as to whether the Amount A rules can be applied in practice if the US isn’t participating.

Notably, Canada didn’t sign the statement because it has already enacted legislation that will bring its digital services tax into effect in 2024. This defection marks the first time that a G7 country hasn’t marched in lock step with the other G7 members regarding the two-pillar plan.

Regarding Amount B, the outcome statement tells us that further work is ongoing and aims to be completed by the end of this year. Outside stakeholders will have the opportunity to submit comments by Sept. 1 on, presumably, a consultation document to be issued soon.

A model treaty provision regarding the Subject to Tax Rule has been agreed on by the 138 signatories. It will be issued in final form, along with a multilateral instrument to facilitate its adoption in bilateral treaties, by the beginning of October. The STTR is intended to negate treaty limitations on withholding taxes applicable to related-party payments in cases where the nominal rate of tax is less than 9%. The STTR has never been the subject of any public consultation.

There were public consultations in 2022 on various components of the Amount A rules, with very short deadlines. And on certain issues, such as the revenue sourcing rules, many stakeholders said the draft rules would be unworkable in practice. The outcome statement indicates a plan to finalize the Amount A rules by the end of this year with no further public consultation on any part of the rules.

Two primary messages emerge here. First, the Inclusive Framework is kicking the can down the road. Negotiations will continue on outstanding issues for the next several months at least. Second, it’s becoming increasingly clear that the Inclusive Framework isn’t really interested in receiving input from outside stakeholders.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jeff VanderWolk is a partner at Squire Patton Boggs (US) LLP.

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